Capital Markets

Return of institutional capital and increasing industrial investment deals

Institutional investors and real estate funds sped up their hunt for industrial assets. In fact, among the aforesaid HKD1.9 billion transactions, all were acquired by funds or institutional investors. In January 2021, Kailong, a fund manager active in Greater China, acquired Hang Fat Industrial Building near Lai Chi Kok station. This property is expected to be redeveloped into a new industrial office building3 . Another pan-Asian fund manager, SilkRoad, also purchased Smile Centre near Fanling station, which is currently leased for logistics use. Meanwhile, Goodman purchased ground floor to fourth floor of Seapower Industrial Centre in Kwun Tong, with cold storage facilities, for HKD570 million (USD 73.5 million).

Looking into 2021, we believe institutional capital and funds will become more active again, given the pent-up acquisition requirements that have piled up over the last 18 months due to the market uncertainties, which now seem to be easing. Compared to the retail and office sector, industrial properties demonstrated a high level of resilience and stability in terms of rents and capital values. Meanwhile, the industrial Revitalisation Scheme 2.0 also presented investors with redevelopment opportunities, and some investors are eyeing the relaxed plot ratio restrictions to improve the return on their investments with higher floor area ratios.

Whatever happens, real estate investors need to be innovative and adaptable, forming investment strategies which align with these structural changes.

COVID-19 has plunged the world into one of the most uncertain periods on record. Gold has hit record highs, equity volatility is elevated and government bond yields around the world remain low. Yet against this backdrop, we predict that real estate investment will remain attractive, thanks to lower volatility than other asset classes, a history of strong returns through longer-term direct investment, and, crucially, its ability to generate income in a world where 60% of bond yields globally are below 1%1 and over $14 trillion have negative yields.

For the service sector, a greater domestic workforce of support staff will offer renewed demand for office space. Localised employment growth in manufacturing, storage and service sectors will also enhance demand for other types of real estate, including residential and healthcare. There will also be indirect opportunities for international real estate investment. As an alternative to increased localisation, cross-border property investment offers global diversification and more options to meet revenue targets.

Nationalism and the advent of trade wars were already on the ascendency, but recent disruptions to business continuity, and overseas travel caused by the pandemic will only accelerate this trend. This has prompted discussions of reshoring (bringing foreign operations back home), onshoring (bringing supply chains within national borders) and nearshoring (bringing operations closer to home). Some types of real estate will thrive as a result. The logistics sector is seeing additional occupational requirements, which have translated into an even stronger investment demand.

Key Forecasts and Outlook: Logistics & Industrial Market

•Across APAC, demand for logistics space has been supported by a long-run shift from physical to online retailing. COVID-19 has driven up e-commerce volumes sharply, while expansion in the cold chain sector and new infrastructure developments should boost demand further. •Most investors and developers already see logistics warehouses as a core asset class.
•With firm demand and limited supply in China’s Tier 1 cities, tenants and owners may have to seek space and opportunities in locations away from the main centres.
•Japan stands out as underserved by modern logistics stock, even though the small modern logistics clusters (e.g. Nagareyama/Kashiwa near Tokyo and Ibaraki City near Osaka) offer some of APAC’s largest and most advanced warehouses. The low availability of modern units means investors and developers can apply value-add strategies to older stock. It is increasingly common to demolish and rebuild.
•Australia has ample Grade A logistics stock, but it is tightly held and vacancy rates are well below their long-run averages. Investors should be willing to buy a portfolio of assets to achieve scale.
•In India, Mumbai and Delhi NCR have vacancy rates of 10-11%, but the other logistics clusters have vacancy of 15-30%. New supplying 2020 is modest in all markets except Delhi NCR.
•Singapore is one of the best-served Asian logistics markets, with a per capita Grade A stock on a GFA basis of 0.8 sqmetres(versus under 0.2 sqmetresin Osaka or South China). As a result, vacancy is 11.7% and we expect modest average annual five-year rent growth of 0.8%.
•Demand for cold chain delivery is soaring. Looking ahead, we expect that big purpose-built cold chain warehouses will be built near ports and transport hubs, while renovated cold chain warehouses will be located nearer cities for easy distribution. Occupiers and owners will find opportunities in both types.

During 2020, private-equity investments into the Indian real estate sector declined 23% from2019. At this juncture, investors are also eyeing alternate assets, as well as projects that require last-mile funding. Investment firms and global developers are undertaking development risks in India and constructing office parks.

> We recommend investors fund stalled projects in the final stages of construction. These projects mitigate risks as project approvals are already in place.

> We also recommend investors focus on logistics and datacenter assets to take advantage of the growth in these sectors by converting them into a Real estate investment Trust (REIT)offering.